American drug maker Pfizer is attempting to acquire AstraZeneca, the United Kingdom’s second-largest pharmaceutical company. If successful, Pfizer would avoid paying billions of dollars in U.S. taxes by becoming a U.K.-based corporation, and Pfizer executives have made these tax benefits a central element of their pitch to AstraZeneca. This corporate maneuver, in which a U.S. corporation becomes a foreign corporation for tax purposes, is called a corporate inversion. Lawmakers on both sides of the aisle have fought back against corporate inversions for years, and they could be stopped if Congress were to strengthen laws passed 10 years ago.

Preventing corporate inversions would not be complicated, and Congress should move quickly to pass stand-alone legislation to do so. While comprehensive tax reform has the potential to strengthen our international tax system, it means different things to different people. If done incorrectly, tax reform could become little more than a race to the bottom to cut corporate taxes as much as possible. The potential Pfizer-AstraZeneca merger shows the pitfalls of corporate tax cuts: Even though the United Kingdom would become Pfizer’s new tax headquarters, the United Kingdom could still lose jobs as AstraZeneca would become little more than a tax planning tool.

Congress has stopped inversions before and can do so again

Lawmakers on both sides of the aisle have long been concerned about corporate inversions. Sen. Charles E. Grassley (R-IA) said it best back in 2002:

These expatriations aren’t illegal. But they’re sure immoral … During a war on terrorism, coming out of a recession, everyone ought to be pulling together. If companies don’t have their hearts in America, they ought to get out. Adding insult to injury, some of these companies have fat contracts with the government. So they’ll take tax dollars, but they aren’t willing to pay their share.

A Republican-controlled Congress and then President George W. Bush acted on those concerns as part of the American Jobs Creation Act of 2004, which requires the most blatantly inverted corporations to pay taxes as if they were still domestic corporations, eliminating the tax advantages of inversion. This law prevents many corporate inversions, but it still leaves the door open for Pfizer-AstraZeneca-like mergers.

When a U.S. corporation becomes a foreign corporation, the American Jobs Creation Act labels it as an inverted corporation if the former shareholders still hold 80 percent of the new corporation’s stock and if the corporation does not have substantial business activities in the foreign country it claims as its headquarters.

The American Jobs Creation Act put a stop to the most egregious inversions where the foreign corporation acquiring the U.S. business is little more than a shell company. However, this may not be enough to stop the transaction that Pfizer is contemplating: Its shareholders would own less than 80 percent of the company after its proposed acquisition of AstraZeneca. Reports indicate that at least 15 other U.S. corporations are also looking into similar corporate inversions. While the American Jobs Creation Act did impose tax consequences on newly foreign corporations in which former U.S. shareholders hold at least 60 percent of the stock, these rules have not been effective deterrents against inversions.

Lawmakers have successfully clamped down on corporate inversions in the past, and Congress can put a stop to this latest round by tightening the rules they created 10 years ago. President Barack Obama has proposed expanding the definition of inverted corporations to include cases in which more than 50 percent of the new corporation’s stock is held by shareholders of the former U.S. corporation rather than the current 80 percent threshold.

Under this proposal, Pfizer shareholders would not be able to hold a majority stake in an AstraZeneca merger without being subject to the inverted corporation rules. The nonpartisan Joint Committee on Taxation estimates that this would bring in more than $17 billion in revenues over the next 10 years—money that would otherwise be lost to inversion.

Avoiding a race to the bottom

While it may seem as though the United Kingdom is a winner in the proposed Pfizer-AstraZeneca deal, this does not actually appear to be the case. The United Kingdom recently cut corporate taxes, particularly for patents, which makes it particularly advantageous for Pfizer to become a U.K.-based company. However, Pfizer would still be controlled from its New York offices after absorbing AstraZeneca, and British jobs could be lost in the merger. As Chuka Umunna, the Labour Party’s shadow business secretary, put it, “Do we really want a jewel in the crown of British industry, our second-biggest pharmaceutical firm, to basically be seen as an instrument of tax planning?”

The only clear winner in a Pfizer takeover of AstraZeneca is Pfizer itself. Multinational corporations have every incentive to encourage countries to continue making deep cuts to corporate taxes in an international race to the bottom—and the United States should not fall into this trap. According to the World Economic Forum, the United States remains one of the best countries in the world in which to conduct business because of its large economy, flexible workforce, and top-notch research universities, despite complaints from business executives regarding U.S. tax policy.

Corporations may try to avoid U.S. taxes, but they are not avoiding the U.S. economy. In some cases, the “foreign” profits of U.S. corporations are actually earned in the United States, but corporate accountants shift them offshore for tax purposes. In 2011, 40 percent of U.S. corporations’ foreign profits were booked in Bermuda, Luxembourg, Switzerland, the Netherlands, and Ireland—all of which are tax havens.

The right way to reform international corporate taxes

The United States can—and should—reform its international tax system. We currently have a worldwide corporate income tax, which means that the foreign income of U.S. corporations is subject to U.S. taxes. However, those taxes may be deferred until the foreign income is brought back into the United States—meaning that if the foreign profits never return to the United States, they are never taxed.

These deferral rules create a tax benefit for foreign profits and encourage companies to invest those profits offshore instead of domestically. For example, Pfizer may use its foreign profits to acquire AstraZeneca. The deferral rules in the U.S. tax code actually create an incentive for Pfizer to make these types of foreign investments instead of creating American jobs by investing in domestic research and development.

A corporate minimum tax would eliminate incentives to park money in tax havens since any foreign earnings taxed at very low rates would be immediately subject to the minimum tax. If a global minimum tax rate is set relatively close to the statutory corporate tax rate—which could be reduced as part of comprehensive tax reform—then businesses would have less incentive to invest offshore or shift their profits overseas.

But some tax reform proposals move in the opposite direction and actually increase the incentive to invest overseas. For example, Rep. Dave Camp (R-MI), the chairman of the House Committee on Ways and Means, advocates moving to a mostly territorial system under which 95 percent of the foreign earnings of U.S. companies would not be taxed at all. Rep. Camp’s Republican tax staff claims this “would allow U.S. companies to compete on a more level playing field against foreign multinationals when selling products and services abroad.” However, exempting foreign profits almost completely from U.S. taxes would make U.S. corporations even more likely to shift their operations overseas or to use accounting tricks to move their profits into foreign tax havens. While Pfizer may be able to avoid U.S. taxes under current law by acquiring AstraZeneca—although this merger is far from a done deal—a territorial system would automatically enable Pfizer to avoid U.S. taxes on its foreign profits altogether.

Instead of dishing out corporate welfare, lawmakers should focus on building the most competitive economy possible. Reforming the tax code is an essential component of accomplishing this goal, as is investing in workforce development, education, science, infrastructure, and other tools for growing the economy from the middle out. While tax reform is an important goal, it should not be used as an excuse to block stand-alone actions to stop tax avoidance through schemes such as corporate inversions.

Harry Stein is the Associate Director for Fiscal Policy at the Center for American Progress.